CBDC stands for Central Bank Digital Currency. It is gaining more popularity and has become a hot-shot topic in the finance, tech, and digital currency ecosystem.
In this blog, we will get to know what is CBDC, how it works and why is it such an important topic.
What is CBDC?
CBDC refers to the digital currency issued by a specific country’s national bank. Think of it as a digital version of your cash in a wallet. But instead of being printed in physical form, it exists in only digital form.
You cannot hold it but only see it on your digital wallet in your digital device. But just like dollars, CDBC would backed by the government and could be used to buy goods and services.
How is CBDC different from the money in your bank account?
You may be thinking that even the money in your regular bank account is digital, so how is this different? Most of the money in your bank account is digital but there is a key difference between that and Central Bank Digital Currency (CBDC).
The money in your bank account is a claim on money that the bank owes you. Whereas, CBDC, would be the money itself which is directly issued by the central bank.
Why are central banks interested in CBDC?
Here are some of the main reasons why central banks of many countries are out and about interested in CBDC:
- Financial inclusion: CBDC could turn out to be very helpful for people who do not have bank accounts. They could access financial services very easily without the need for a bank account.
- Tech advancement: Since everything is being digitalized, people are moving towards digital payment at a very fast pace, so the central banks want to make sure everyone uses the digital mode of payment and no one is left.
- Competing with crypto: Many of the central banks around the world see CBDC as a digital alternative to private cryptocurrencies like Bitcoin.
- Improved payment systems: CBDC has the potential to make payments faster, more efficient, and cheaper as well.
How would CBDC work?
The working of CBDC would depend on each country, and what systems they use, but here are some basic ideas:
- Online and Offline use: CBDC could be used for online purchases and potentially for offline, in-person purchases as well without any internet connection.
- Digital wallets: You might have a digital wallet with you at all times on your phone, laptop, tablet, and computers for storing and spending CBDC.
- Interest-bearing: Some form of CBDC might help you earn interest like a savings account.
- Programmable money: CBDC could be programmed with specific rules and regulations for instance restrictions, expiration dates, and more, on what it can be used for.
What are the potential advantages of CBDC?
Now let’s get to know some benefits of Central Bank Digital Currency:
- Lower costs: There would be no intermediaries like banks between the payments so the transaction feed could be reduced drastically.
- Faster Payments: CBDC would enable near-instant money transfers even across borders since it may not require any interment connection.
- Reduced tax evasion: Since digital transactions are easier to track it could help combat any kind of illegal activities like tax theft and more.
- Financial ease: People who do not have bank accounts would also easily participate in the digital economy due to CBDC.
What are the risks or concerns of CBDC?
Like any new tech or advancement, CBDC also has some concerns related to it:
- Cybersecurity: Since it is a digital currency there are more chances of risks like hacking, bugs, or some other technical glitch.
- Privacy: CBDC could raise questions about how much personal information banks could have access to.
- Tech access: Not everyone can afford the latest smartphones which could create a new form of inequality among people.
- Impact on banks: If people move towards CBDC and start to trust it more instead of bank deposits then it could affect how banks operate.
- Financial stability: Many concerns are there, that during a crisis or emergency, it won’t be too easy to move the money from bank accounts into CBDC.
The Bottom Line
Central Bank Digital Currency (CBDC) is not a reality in many countries of the world but in the future, it could completely change the whole financial system.
It might make payments faster and easier but our relationship with banks could alter and raise new queries about our personal information. It would be a good decision to stay informed about CBDC.
The way we use money has changed a lot in the past from later exchange to paper money, now digital money could be the next step in the financial system.
